Beyond net zero: Redefining climate accountability

Media pieces, organizational charts and annual reports have often delegated climate to its own corner of the business conversation. However, forward-thinking executives who understand the importance and impact of climate risks are working across their organizations to assess and address this in a cross-cutting manner.

Climate change poses a suite of complex and uncertain risks to nearly every sector of the economy. While general physical risk vulnerability may be similar across sectors, many risks are specific to the organization itself. For instance, an entity’s legal liabilities for historic climate damages, regulatory duties to disclose and reduce emissions, and exposure to transition risks across its supply chain, labour force and assets are inherently unique.

Businesses now face the dual challenge of measuring, mitigating and managing the climate burden their own operations may have on the public, as well as quantifying and mitigating the specific and unique impact climate change will have on their own profitability. Dedicated resources throughout the organization are now necessary for companies to develop a comprehensive and accurate assessment of the climate risk for the company and for society at large.

Most businesses will reach a critical juncture as they recognize that social license and policy compliance in the coming decades will require disclosing and addressing climate risk. For example, consider a technology company that is pursuing new business in the development and operation of data centres. To meet its climate commitment, the company will need to measure and disclose these emissions, develop approaches to mitigate emissions across its operations – from building materials to power consumption – and identify and manage physical climate risks, including grid stability and extreme weather events.

In this regard, a single corporation’s climate risk strategy spans far beyond the sustainability team to include insurance, manufacturing, procurement, construction and human resources. And this organization’s climate risk strategy will not take place in a vacuum; energy developers, steel and cement suppliers and chip manufacturers will all need to assess their own climate risk to compete for business associated with these new data centers.

To effectively manage these emerging physical, regulatory and transitional risks, asset managers and corporations must develop and act on risk assessment, mitigation and adaptation strategies for the suite of climate risks across business lines. Boards and shareholders may no longer operate under the assumption that modeled emissions reduction strategies and net-zero commitments are sufficient to hedge the risks of climate change.

Climate adaptation and mitigation interventions must be implemented across business lines with urgency to stave off the worst climate damages, comply with regulations and reduce legal liabilities. The benefits of early action are likely to be enduring, as they can reduce losses from physical climate impacts, market differentiation and regulatory hedging.

Beyond addressing the 28% of global emissions already covered under climate pricing policies, businesses must now also address trade risks and comply with emissions and climate risk disclosure regulations. Policy-makers are moving beyond domestic and jurisdictional carbon tax policies to reduce emissions and are beginning to implement trade policies that will penalize carbon-intensive materials.

As major economies, such as California and the European Union, implement policies to mandate emissions and climate risk disclosure, the wide-reaching impact of these policies will extend beyond their borders. Since these policies are likely to incorporate value chain and indirect emissions, covered entities will now face pressure to work with partners that can provide accurate and timely information on their own climate impacts and risks.

Businesses that can rapidly and transparently leverage supply chain and operational interventions to reduce the emissions intensity of key commodities, such as steel, chemicals and fuels, will gain strategic advantages, even as broader trade negotiations mature.

As the push for climate risk disclosure policies from national and subnational governments grows, these policies introduce another consideration: the legal and punitive risks of submitting or verifying inaccurate reports. To address the climate risks themselves, as well as the legal risk of submitting inaccurate or misleading reports, corporations will need to deliver scientifically sound, timely and accurate climate risk reports.

The cost of assembling a legally-compliant disclosure of climate risk under the suite of forthcoming policies may be expensive. However, the investor fallout, potential legal actions, reputational risks and regulatory fines associated with inaccurate or non-compliant disclosures should make climate risk a priority across divisions of any company. Moreover, the risk of climate litigation for harms to civil society, while still not fully established, could also pose substantial risks to the financial viability of many businesses.

Climate mitigation is a global environmental imperative and an economic one. In addition to mitigating risk, corporate climate action and associated policy directives should be recognized as an opportunity to develop new lines of business for more efficient or lower-emissions products, differentiate from competitors and reach new global markets.

Businesses that expeditiously identify and act on the lowest cost opportunities to reduce emissions and manage climate risks to assets, while transparently disclosing progress, may lock in competitive advantages. Whether securing a long-term trade agreement for low-carbon materials, building investor trust through sustained, high-integrity disclosure and reporting or building consumer trust through transparent climate action, the business case for climate-informed business spans well beyond the cost of a carbon tax.

To find out more how organizations can develop climate-informed business strategies and more about the transition to net zero, visit Carbon Direct's website here.